By Bhavik Patel
A single sneeze, and the world catches cold. The market worldwide is reeling under pressure as their currencies continue to get devalued against a strong dollar.
Turkey was first to sneeze and now, it appears that the contagion might spread throughout emerging markets. World market is already under too much debt. If we look at most of the countrys debt to GDP, its are more than 50 per cent, and for many of the advanced economies such as the US, Japan, the UK and Italy, the figure is more than 100 per cent.
The problem is most of emerging markets debt is dollar denominated. With a rise in US dollar, all emerging market currencies have devalued. It becomes difficult for countries to repay their debt as it becomes expensive to pay in the dollar as their currencies already have devalued.
Take Turkey, for example. Turkey has 16 billion of dollar denominated debt due in next 8 months. Its currency has devalued by more than 40 per cent against the dollar. Turkey doesnt have that much dollar reserve. So, it will have to pay in lira, which means it will have to pay 40 per cent more.
Countries such as China and Turkey have taken steps to stop their currency fall that include increasing margin requirement to short sell their currencies. But its only a band aid to a much bigger problem.
The problem is not just Turkey. The dollar has been rising since February, creating havoc for emerging market currencies. To top it, crude oil prices have also started rising since the end of the previous year, which put added pressure on emerging market (EM) currencies. Thankfully, crude prices have stabilised for now, but the strong dollar is a headache for EM currencies, including Indian rupee.
The risk of contagion is European and US banks and corporations are holding Turkeys dollar denominated debt. If Turkey fails to pay, it will have negative repercussions on their balance sheet as well as the reserve requirement of central banks. This global turmoil is adding extra strength to a dollar as investors are now accumulating safe haven currencies like the US dollar, Japanese yen and Swiss franc.
The rupee last week hit an all-time low against the dollar. This has led to fears of Fragile Five economies composed of Brazil, Indonesia, India, South Africa and Turkey. India at least has good control of inflation and limited external debt compared with Brazil, South Africa and Turkey.
But any fear of contagion will see capital outflow from emerging markets and into the dollar. So Turkey has sneezed and we have caught a cold. As long as the situation does not improve, Indian rupee will bear the brunt of a strong dollar.
(The author is Senior Technical Analyst, Tradebulls Securities)
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